Mon May 21, 2012

G8 Summit Drives Home Effects Of Euro Crisis

I'm Michel Martin and this is TELL ME MORE from NPR News. Coming up, we want to talk about the hottest spring trends, but - no - we're not talking fashion. We're talking about food. Washington Post food critic, Tom Sietsema, gives us a few things to chew on in just a few minutes.

But, first, we want to talk about an international meeting that could have a big impact on what you and I might be paying for that meal out. Leaders from Canada, France, Germany, Italy, Japan, Russia, the United Kingdom and the U.S. met at Camp David over the weekend for the G8 Summit. That's the annual meeting of the leaders of the world's largest economies.

The big focus was on how this group of economic powerhouses would handle the European financial crisis. That crisis is deepening as Greece talks about leaving the eurozone, but the crisis and the talks could affect places well outside of Europe. We wanted to talk more about that, so we've called Sudeep Reddy. He is a reporter for The Wall Street Journal.

Thanks so much for joining us once again.

SUDEEP REDDY: Great to be here.

MARTIN: So you can imagine that there are a lot of people who've been following the news and thinking, you know, it's a shame what's going on in Greece. It's a shame that people are having so much turmoil and difficulty, but what does that have to do with me here in the U.S.? What's the answer?

REDDY: Well, the risk that we're facing now, is that we could see a financial disaster that rivals the one we saw in the fall of 2008.

MARTIN: You mean in the U.S.?

REDDY: In - around the world. It would be another - the risk is another global financial crisis that starts from Europe, instead of starting from the U.S., and spreads around the world and takes down banks, not only in Europe, but across the pond, and affects countries and major economies all around the world, brings us down, weakens our trade and really pulls back on economic activity.

And, if it becomes worse than it was in 2008, then that means it's likely that we could see at least a slowdown in the U.S., if not an outright recession.

MARTIN: Well, what is at the heart of this phase of a financial crisis? I mean, and people will remember that were are a couple of phases to the first one, but a big part of the first one was that there were overvalued, like housing, for example, was way overvalued. And, when that became apparent, you know, there was a huge crash. We saw that. You know, construction falling off a cliff. You know, housing starts falling off a - what's at the heart of this crisis now in Europe?

REDDY: Exactly. Both crises, the one in 2008 and the one we could be facing now, are all about debt. The one before was about housing debt in the U.S. This one is really about government debt and it goes to the core of what Europe has been trying to do for, really, the last 60 or 70 years, since World War II.

They've been trying to figure out a way to create a stronger Europe, one Europe that doesn't fight wars like they've been fighting for centuries. And one way to do that was to create a common currency. And so they had the Euro and created a currency that now has 17 countries out of the 27 European Union countries participating in this currency.

And, for the last decade, they've actually done fairly well in building a currency that, in some senses, is starting to rival the U.S. dollar as something that people see as a really important piece of the U.S. - of the international financial architecture.

And so, in this case, the Euro has 17 members and they all - while they share a currency, they have different budgets and different budget policies and so they can all borrow at different scales. And you have some really strong ones, like the biggest, Germany, that's really disciplined and takes great care in making sure it doesn't spend too much. And, on the other hand, you have Greece, and Greece hasn't been able to collect taxes properly. It hasn't been able to really manage an economy or manage a budget in the way that it needs to and, as a result, for the last two years, it's been going in and out of these phases where it always needs a bailout, but it's at risk of now falling to the point where even a bailout isn't going to help.

MARTIN: Well, you've been hearing the debate over the weekend between growth versus austerity. I mean, anybody who's been, sort of, following international news, even, sort of, lightly, you know, you hear people in Greece saying, we can't take any more. We've had enough. And then you hear people sort of on the other side saying, well, you know, we're not going to keep working like crazy to support your lifestyle, so it's got to be austerity.

Did the G8 leaders manage to reconcile those very different points of view, at all, over the G8 Summit weekend?

REDDY: They didn't, really. Saying that you're for growth, which all the G8 leaders want, is like saying you're for world peace. Everybody wants growth. Everybody wants their economies to prosper. And, in this case, it's not really clear how you solve a problem like Greece without somehow making sure that their spending matches their rate of borrowing and tax collection and all the things you need to make a government and a country run.

And they've come to the point where they can't go out and borrow. Nobody's going to make a loan to Greece other than their neighbors. And so, unlike the U.S. where we actually do have the ability to borrow and borrow fairly cheaply, Greece has to cut to be able to pull this off because they're relying on their neighbors, like Germany, to fund the country right now.

MARTIN: Well, you can see what part of the U.S. role in this would be if there's another kind of huge downturn in Europe. There's going to be less market for U.S. products and so on and you can kind of see the impact there. But are there other impacts on the U.S. that aren't being as talked about as much? And is there a U.S. role in solving this problem?

REDDY: Exactly. The broader economy is the concern here - is that, if Europe were to go down, Europe as a whole is about the size of the U.S. economy and, if you have such a large player - about a fifth of the world go down, then it's going to pull down everyone else, and so the direct economic effects are really important.

The big unknown in all of this are the financial effects. Europe has huge banks and those banks are holding government debt. They're holding Greek debt. They're holding Italian and Spanish debt. And the big fear now is not necessarily just about Greece, but that this problem spreads to the other weaker members of the eurozone that share this currency - Italy, Spain, Portugal, Ireland. They're all under severe pressure and, if they start falling apart, they will all come to the point where they won't be able to borrow. They would need bailouts, as well, and then you start getting into much thornier discussions, not only for the Europeans.

They've actually gone through this for the last two years, creating their own version of the bailout that we had in 2008, so they've got about $600 billion right now that they could use to bail out their neighbors, but that's not nearly enough to solve their problems. And so they might need international loans through the International Monetary Fund, which is the emergency lender.

And the U.S. has a share in that and so we could, in the coming months, face a debate in the U.S. about whether the IMF is going to have a deeper role in bailing out Europe. And obviously, all of that will carry over into our own politics and our own debate here about whether we've done enough and whether we should be rescuing people around the world when we have our own troubles.

MARTIN: And, to that end, this is the last question I was going to ask you. How is the European crisis, if that's the right word to use? Is that the right word to use, by the way? Crisis is right?

REDDY: It absolutely is. Yeah.

MARTIN: It is right. OK. So now we know why you're not sleeping. Is the European crisis affecting domestic politics? I mean, we're having our own growth versus austerity, you know, bailout, no bailout, you know, cut versus spend debate here because it's - in part, because it's a presidential election year. In part, because we really do have deep philosophical differences in this country.

But is the European crisis affecting the political argument in the U.S. right now?

REDDY: Absolutely, it is. And our election is obviously going to be about the role of government and they're having that debate right now. How much - how large a government can they handle in Europe? And, as they have this, it's obviously affecting financial markets. It's affecting broader economies and the crisis in Europe is probably - between now and November - the most important factor that's going to affect the course of our economy, which means that Europe is going to play a bigger role than anything else in determining who could win the election.

And, obviously, it's a fairly simple formula. Anything that hurts the U.S. economy is probably going to help Mitt Romney become president, and anything that helps the U.S. economy is probably going to substantially raise the chances that Barack Obama becomes reelected.

And so the direct ties carry through to our economy and to our politics, as well.

MARTIN: Sudeep Reddy is a reporter with The Wall Street Journal. He was kind enough to join us here in our Washington, D.C. studios.